We alluded to this idea in today’s newsletter ‘A Game-Changer for SPKL, A Key Detail for CGYV‘, but the evidence for our case presented itself shortly after it was published. If you want proof that you shouldn’t get involved in the post-confidence-announcement simply beause it’s pointless, check out this list of news items we stumbled across just now….

The stories were written at almost the exact same time by two different journalists with the same organization, yet with clearly conflicted interpretations. Worse than that, those opinions will be ‘updated’ - and possibly reversed - when we get October’s confidence data.

Point being, you/we/us need to develop a strategy and stick with it, making sure that strategy is time-frame appropriate. You can’t use monthly (or multi-month in this case) data to make daily decisions. That’s why we’ll continue to interpret the Conference Board’s poll the way we do.

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Thanks for all the great feedback and opinion regarding Friday’s op-ed ‘A Tale of Two Chinas… Consumers Vs. Industry‘. As always, feel free to agree, disagree, or add ideas - just do so with the intent sharing perspectives that are intended to help everyone make or save some money. Here’s the first batch of reader thoughts about the article (and we’ve responded where appropriate).

As a European investor on an entirely personal basis, and most probably using access points to the Chinese market that may differ from the US, I welcome your cautionary note.

Even so the problem is knowing precisely where the access points are.

I invest solely in funds that are China experts (well, so called) and made substantial profits when the going was good and got burnt like most of us, when the latest bubble burst. Now I slice the cake at regular intervals taking of the icing. It seems to work but I find difficulty in reinvesting in any better returns.

Question. Do you see a market that is risk prone, has a strong upside with less government control/interception where the cake?s icing could be reinvested.?

Editor’s response: Thanks for the note.

Regarding your ‘access point’ dilemma, you hit the nail on the head. There aren’t many, and there are even fewer you can trust. Digging through all the data to find the real opportunities is just going to take a lot of homework.

As for diminished government involvement in China being the key to any real fiscal success, yes, I think that’s the key to longevity…. but I don’t think that’s going to happen.

One way or another, the government has a hand in the bulk of the country’s enterprises, and (unfortunately) when things aren’t going well, they’re likely to interfere more than less. Of course, that’s not a long-term fix - just a short-term patch. And yes, that’s one reason why China is more of a liability than an asset right now.

It’s not necessarily going to be a disaster, but it sure won’t help. Like I said in the op-ed though, even if those companies are artificially profitable, that’s good for investors as long as they are.

We also got this e-mail….

I think China is topping as is the United States.

The dramatic decline in credit in China and the massive decline in credit in the USA in my view make a decline in both markets a virtual certainty.

I do not think it is possible the USA do have a recovery until credit increases.  We have a negative multiplier effect and for every dollar of credit lost many more are taken from the economy.  It is the exact opposite of what happens when credit increases.

Editor’s response: Thanks for the comments.

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By now, all of our readers have had enough time to digest last Friday’s newsletter “Which is Crazier - Current, or Projected, Valuations?” There’s no absolute answer to the question… the point was simply to highlight that by historical standards, stocks were currently expensive, but unrealistically projected to be very cheap within the next twelve months. Though the data was real, it was only a seed for a couple of other key points we wanted to make later (as in today). One of our readers - via e-mail - made the same basic point this morning that we were going to today. First things first though.

Point #1: Yes, large cap growth stocks were the least expensive ones of the bunch. And, small cap value was the most expensive group. What we didn’t tell you then was something many of you may have put together mentally anyway….. large cap growth names may have the lowest P/E simply because large cap growth stocks have trailed - significantly - since March. That was part of the reason we highlighted the the data we did about value versus growth back in the August 28th analysis.

So what? Had large cap growth kept pace with the rest of the market (on average) after hitting bottom in March, its P/Es probably would be about the same as the rest of the market’s.

Again, so what? We only point it out to clarify that large cap growth isn’t necessarily an undervalued opportunity right now. All the other groups are overpriced, but are also likely to be reeled in (lose value) more so than other large cap growth. It takes a whopping disparity to really say one group or class is undervalued…. much bigger than the one we looked at. It’s an edge to be sure, but not a game-changer.

Point #2: We were going to discuss one of these premisies anyway, but since a reader brought one up with the other, let’s just post his note to get the discussion started….

Thanks for the operating P/E analysis. Two comments: 1. P/E’s are lower in high interest rate environments and vice versa when interest rates are low (I haven’t seen any commentators who get this, but it’s only common sense: Stocks compete with bonds, so with lower yields, stocks don’t have to be as competitive.); 2. P/E’s are always relatively high coming out of recessions.

Thanks for the note (which came from Paul Martin, of www.martincapital.com).

No real argument from our end on either point, though we’ve not consistently observed that a high P/E coincides with low interest rates very well.

Oh, the logic is sound - low interest rates should be seen with high P/Es, and vice versa. We just haven’t seen investors apply that logic enough to depend on it as a tendency (the market can be stunningly irrational at times). There may be so many other factors in effect, where the price pressure - or lack of - is coming from at any given time can get fuzzy. Point well taken though…. bonds are just ugly right now, making stocks the best thing going - even if expensive. What happens if yields improve? Or, will they not improve anytime soon? All are things to consider.